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Bill stuffer cannot add an arbitration clause
March 19, 2009 by Ross Runkel at LawMemo
When Santana Kortum-Managhan signed up for a credit card with the Herbergers department store, the agreement did not include an arbitration clause. However, it did contain a provision purporting to allow Herbergers to unilaterally change the agreement as it saw fit and specifying that a cardholder’s continued use of their Herbergers’ credit card or other services constituted agreement to Herbergers’ unilateral change in terms.
Later, Herbergers mailed out a notice (known as a "bill stuffer") in Kortum-Managhan's monthly bill. This document contained various changes in the terms of the agreement including the addition of an arbitration clause.
When Kortum-Managhan brought suit alleging violation of federal and state statutes, the store moved to compel arbitration. The trial court entered an order compelling arbitration, but the Montana Supreme Court reversed.
Kortum-Managhan v. Herbergers (Montana 03/17/2009) (5-1 vote).
The court cited a Montana constitutional provision protecting the rights to trial by jury and access to courts, and labeled these "fundamental constitutional rights that deserve the highest level of court scrutiny and protection." The court said "the waiver of a fundamental constitutional right must be proved to have been made voluntarily, knowingly and intelligently."
The court held that the store failed to show that the cardholder had "deliberately, understandingly and intelligently waived [her] fundamental constitutional rights to trial by jury and access to the courts."
The court said that the bill stuffer "is ambiguous and misleading because it seeks to waive the cardholder’s fundamental constitutional rights with a clause blended into the end of a document when bold type, capital letters and larger fonts are used to draw attention to other clauses."
"Based on the foregoing, we conclude that making a change in a credit agreement by way of a “bill stuffer” does not provide sufficient notice to the consumer on which acceptance of the unilateral change to a contract can be expressly or implicitly found."
The DISSENT said, "people should read their mail - especially when it comes from their credit card companies."
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Arbitrator's manifest disregard of the law - a dying doctrine
March 17, 2009 by Ross Runkel at LawMemo
Scenario: An individual employee and her employer agree to arbitrate the employee's claim against the employer. Perhaps Title VII, ADA, ADEA, whatever. They go to arbitration, and the arbitrator makes a decision. The loser reads the decision and sees a clear error in legal reasoning.
Can the loser in arbitration get the arbitrator's award vacated on the ground that the arbitrator acted in "manifest disregard of the law"?
It would seem that the answer has to be "no" even though many courts have said "yes." The answer has to be "no" because the Federal Arbitration Act contains an exclusive list of legal grounds for overturning arbitration awards. And the US Supreme Court in Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S.Ct. 1396 (2008) repeatedly stated that the statutory grounds are exclusive. That means non-statutory grounds such as "manifest disregard of the law" cannot be used.
Citigroup Global Markets v. Debra Bacon (5th Cir 03/05/2009) squarely holds:
Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S.Ct. 1396, 1403 (2008) "restricts the grounds for vacatur to those set forth in § 10 of the Federal Arbitration Act (FAA or Act), 9 U.S.C. § 1 et seq., and consequently, manifest disregard of the law is no longer an independent ground for vacating arbitration awards under the FAA."
But wait. Maybe you can wrap "manifest disregard of the law" up in new clothes, and jam it into the list of statutory grounds. As I have said previously [Hall Street: Non-statutory grounds for review],
The Supreme Court has never said (and I believe never will say) that "manifest disregard" exists as a ground separate from the FAA. In Hall Street the Court referred to the concept as "a supposed judicial expansion by interpretation," and mused that it might refer to the §10 grounds collectively, or might be "shorthand" for §10(a)(3) (“guilty of misconduct”) or §10(a)(4) (“exceeded their powers").
And so, when the 5th Circuit remanded the Citigroup Global Markets case, it should be an invitation to the lawyers to make the facts fit the statute.
Other comments on the 5th Circuit case:
5th Circuit Nixes Manifest Disregard as Ground for Vacatur of Arbitration Awards
"Manifest Disregard of Law" Now History in 5th Circuit
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The Unconscionability Game: Strategic Judging and the Evolution of Federal Arbitration Law
March 11, 2009 by Ross Runkel at LawMemo
Here is an interesting article by Professor Aaron-Andrew P. Bruhl at the University of Houston Law Center:
The Unconscionability Game: Strategic Judging and the Evolution of Federal Arbitration Law, 83 New York University Law Review 1420 (2008). [PDF, 71 pages]
We are seeing a lot of court cases in which individual employees resist having their claims sent to arbitration. One of the doctrines used by employees is unconscionability. For example, just yesterday a California Court of Appeal held that an arbitration agreement waiving class-wide arbitration was unconscionable as to meal and rest period claims. Franco v. Athens Disposal (California Ct App 03/10/2009).
Here is the abstract of the article:
This Article uses recent developments in the enforcement of arbitration agreements to illustrate one way in which strategic dynamics can drive doctrinal change. In a fairly short period of time, arbitration has grown from a method of resolving disputes between sophisticated business entities into a phenomenon that pervades the contemporary economy. The United States Supreme Court has encouraged this transformation through expansive interpretations of the Federal Arbitration Act. But not all courts have embraced arbitration so fervently, and therefore case law in this area is marked by tension and conflict.
The thesis of this Article is that we can better understand developments in arbitration doctrine by viewing the case law as the product of an ongoing strategic interaction between courts with differing preferences regarding the spread of arbitration. As the Supreme Court has shut off most other means of resisting arbitration, the state law doctrine of unconscionability has in the last several years become a surprisingly attractive and successful tool for striking down arbitration agreements. The nature of unconscionability analysis is that it is flexible, which provides opportunities for courts skeptical of arbitration to use the doctrine to evade the Supreme Court's pro-arbitration directives while simultaneously insulating their rulings from Supreme Court review. Sophisticated resistance to arbitration is just one side of the story, however.
The approach employed in this Article examines the judicial system as a whole, including the ways pro-arbitration courts respond, sometimes indirectly, to what they perceive as manipulation of unconscionability. The suspicion that some courts are disfavoring arbitration drives pro-arbitration courts to change their strategies, such as by establishing new doctrine that facilitates monitoring and shifts decisionmaking authority. This strategic framework can help us make sense of otherwise puzzling trends in arbitration doctrine and can help us predict what moves will be next. Although the specific subject matter is arbitration, this analysis is also aimed at those interested in more general problems of judicial federalism.
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Vaden v Discover Bank: Federal courts "look through" arbitration petition to determine jurisdiction
March 09, 2009 by Ross Runkel at LawMemo
The US Supreme Court has decided Vaden v Discover Bank (03/09/2009).
[Details] [Full text of opinions]
This was a unanimous decision on one point, and a 5-4 split decision on another point.
Facts:
Discover Bank sued Vaden in state court for nonpayment of her credit card balance. Vaden counterclaimed, raising state-law claims of breach of contract and violation of state statutes regulating credit card fees and charges. Discover Bank then petitioned a federal district court seeking to compel arbitration of Vaden's state-court counterclaims. The federal district court granted the motion to compel arbitration. The 4th Circuit affirmed (2-1).
The Federal Arbitration Act (FAA) itself does not create jurisdiction in the federal courts, and there must be a federal question or diversity of citizenship. The 4th Circuit held (2-1) that federal courts have jurisdiction because of the presence of a federal question in the underlying dispute. Because Discover Bank is a federally-insured bank, the Federal Deposit Insurance Act (FDIA) is implicated by Vaden's counterclaims. The court also found that Vaden's counterclaims are completely preempted by the FDIA. The DISSENT argued that the federal court should look no further than the face of the petition to compel arbitration to see whether a federal question exists; existence of a federal question does not depend on the nature of the underlying dispute to be arbitrated.
The US Supreme Court really decided two separate questions, one in favor of the bank, and one in favor of Vaden. The holding: A federal court may “look through” a §4 petition to determine whether it is predicated on a controversy that “arises under” federal law; in keeping with the well-pleaded complaint rule ..., however, a federal court may not entertain a §4 petition based on the contents of a counterclaim when the whole controversy between the parties does not qualify for federal-court adjudication.
First question: Can a federal court "look through" the petition to the parties' underlying controversy? Yes. All Justices concur on this point.
FAA §4’s text drives the conclusion that a federal court should determine its jurisdiction by “looking through” a §4 petition to the parties’ underlying substantive controversy. The phrase “save for [the arbitration] agreement” indicates that the district court should assume the absence of the agreement and determine whether it “would have jurisdiction under title 28” over “the controversy between the parties,” which is most straightforwardly read to mean the “underlying dispute” between the parties.
Second question: Can a federal court base its federal question jurisdiction on the contents of a counterclaim when the whole controversy between the parties does not qualify for federal court adjudication? No. 5-4 vote.
The majority reasoned: Because §4 does not enlarge federal-court jurisdiction, a party seeking to compel arbitration may gain such a court’s assistance only if, “save for” the agreement, the entire, actual “controversy between the parties,” as they have framed it, could be litigated in federal court. Here, the actual controversy is not amenable to federal-court adjudication. The “controversy between the parties” arose from Vaden’s “alleged debt,” a claim that plainly did not “arise under” federal law; nor did it qualify under any other head of federal-court jurisdiction.
The Fourth Circuit erred when it concluded that jurisdiction was proper because Vaden’s state-law counterclaims were completely preempted. Under the well-pleaded complaint rule, a completely preempted counterclaim remains a counterclaim, and thus does not provide a key capable of opening a federal court’s door.
The dissent argued that the majority's approach is "contrary to the language of §4, and sharply restricts the ability of federal courts to enforce agreements to arbitrate." In the dissent's view, "Discover’s petition does not seek to arbitrate its state-law debt-collection claims, but rather Vaden’s allegation that the fees Discover has been charging her (and other members of her proposed class) violate the FDIA."
My view: This decision will indeed limit the ability of federal courts to enforce arbitration agreements in some cases. However, there will be many cases in which it will be easy to demonstrate that a federal question exists or that there is diversity of citizenship.
Oh yes, I almost forgot. States still exist. State courts are still in operation. Discover Bank could have remained in state court (which is the court they originally selected) and filed a motion to compel arbitration.
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Jurisdiction over non-signatory's appeal from an order denying a stay pending arbitration
March 03, 2009 by Ross Runkel at LawMemo
Arthur Anderson v. Carlisle, argued today at the US Supreme Court, is both factually complex and legally complex.
The gut issue is simple: Whether a federal court of appeals has jurisdiction over an appeal from an order denying a stay, when the application is made by a party who not a signatory to an arbitration agreement.
SCOTUSblog wiki provides the briefs, but does not attempt to explain the case.
The Legal Information Institute at Cornell has an extensive discussion, including this summary of the case:
Section 3 of the Federal Arbitration Act ("FAA") allows parties who have agreed to arbitrate to move for a stay of trial proceedings until they have had a chance to attempt arbitration. In addition, Section 16 of the FAA allows an immediate appeal of judgments denying stay under such circumstances. At issue in this case is whether these sections of the FAA extend to non-signing parties affected by an arbitration agreement. Petitioner Arthur Andersen advised Respondent Wayne Carlisle on a business transaction. As a result of this transaction, Carlisle eventually signed a contract, to which Andersen was a not party, that contained an arbitration agreement. After a dispute developed, Andersen sought a stay in the litigation proceedings in order to arbitrate with Carlisle, despite the fact that Andersen had not signed the arbitration agreement. After Andersen appealed the initial denial of its request for a stay, the United States Court of Appeals for the Sixth Circuit held that it did not have jurisdiction to hear Andersen's appeal because Sections 3 and 16 of the FAA only apply to signatories of arbitration agreements. The Supreme Court's decision in this case may clarify the scope of the FAA's application to non-signatories, including the availability of appellate review of denials of stays.
The formal question presented is:
Section 3 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 3, provides that "on application of one of the parties," a district court shall stay proceedings pending arbitration if the district court concludes that the "issue involved in such suit or proceeding is referable to arbitration" under "an agreement in writing for such arbitration." Section 16(a)(1)(A) of the FAA, 9 U.S.C. § 16(a)(1)(A), provides that "an appeal may be taken from an order" of a district court denying a stay application made under Section 3. The questions presented are:(1) Whether Section 16(a)(l)(A) of the FAA provides appellate jurisdiction over an appeal from an order denying an application made under Section 3 to stay claims involving non-signatories to the arbitration agreement.
(2) Whether Section 3 of the FAA allows a district court to stay claims against nonsignatories to an arbitration agreement when the nonsignatories can otherwise enforce the arbitration agreement under principles of contract and agency law, including equitable estoppel.
The transcript of oral argument (61 pages, pdf) is available [here].
I'd rather not predict the outcome of this one.
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